Western Hemisphere Region

Northern Spring, Southern Chills

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The economic outlook for Latin America and the Caribbean remains very challenging. Regional growth is projected to decline for a fifth consecutive year in 2015, dipping below 1 percent. Weakness is concentrated among South America's commodity exporters, where falling global commodity prices have compounded country-specific challenges. Meanwhile, growth is projected to be steady or stronger for most of the Caribbean, Central America, and Mexico, supported by lower oil bills for importers and robust economic recovery in the United States. The analysis in this report examines core challenges facing the region: the impact of lower commodity prices on fiscal and external positions, the drivers of the slowdown in investment, and the role of economic diversification for longer-term growth prospects.

Contents

Front Matter

Chapter 1: The United States, Canada, and the World: Outlook and Policy ChallengesAlongside weaker prospects, lower oil prices, and currency swings, global growth remains modest and uneven. The outlook and policy challenges in Western Hemisphere economies are shaped by many of the same factors. First, a substantial fall in oil prices will affect the near-term pattern of growth—positively for the United States, negatively for Canada, and broadly neutral for the region as a whole. In this context, a stronger U.S. dollar has been helpful, but more volatile exchange rates also pose risks. Second, weaker expectations for medium-term growth in many emerging markets and advanced economies dampen current investment. Global and regional growth rates have been marked down, although risks are now more balanced than before. Key policy challenges center on raising actual and potential growth and supporting rebalancing. Read more...

Chapter 2: Outlook and Policy Challenges for Latin America and the CaribbeanGrowth in Latin America and the Caribbean slowed to 1.3 percent in 2014 and is projected to dip below 1 percent in 2015. The downturn in global commodity markets remains an important drag on South America's economies, even as lower oil prices and a solid U.S. recovery support activity elsewhere in the region. Country-specific factors, including weak private sector confidence in Brazil and the intensifying economic crisis in Venezuela, further weigh on the outlook for regional growth. Meanwhile, evidence of economic slack remains limited, underscoring the presence of supply-side bottlenecks. Flexible exchange rates can play a critical role in adapting to tougher external conditions, but policymakers will also need to ensure prudent fiscal positions, keep financial sector vulnerabilities in check, and tackle longstanding structural problems to raise investment, productivity, and potential growth. Read more...

Chapter 3: The Commodity Price Bust: Fiscal and External Implications for Latin AmericaThe impact of the recent sharp drop in commodity prices on Latin America's major economies will have important implications for their fiscal and external positions going forward. Several commodity exporters in the region will likely experience a significant and persistent drop in fiscal revenues, requiring some deliberate deficit reduction efforts. Regarding external positions, historical evidence suggests that the deterioration in trade balances will be relatively moderate and short lived. Unfortunately, external adjustment typically does not appear to be driven by a rise in noncommodity exports, but rather by acute import compression, especially in countries with more rigid exchange rate regimes and low export diversification. Read more...

Chapter 4: Recent Investment Weakness in Latin America: Is There a Puzzle?After peaking in 2010–11, real investment has decelerated in Latin America and the Caribbean (LAC), in line with developments in other emerging markets. Coming down from cyclical highs, however, investment ratios are still above historical averages in most countries in the region. This chapter examines the key factors determining the behavior of private investment. The analysis suggests that the sharp decline in commodity export prices is the main driver behind the investment slowdown in Latin America. Lower current cash flows and expected profitability, and increased corporate leverage at the firm level have also played a role, though to a more limited extent than elsewhere. Given the subdued outlook for many key drivers of corporate capital spending, a robust investment recovery in Latin America seems relatively unlikely, unless policymakers can make decisive progress in improving conditions for private investment. Read more...

Chapter 5: Long-Run Growth in Latin America and the Caribbean: The Role of Economic Diversifi cation and ComplexityEconomic diversification and complexity—relating to the range of products that a country produces and how sophisticated these products are—matter for long-term growth. Unfortunately, Latin America and the Caribbean (LAC) have not been able to benefit significantly from these levers so far. Economic diversification and complexity remain relatively low, and the dynamics over the last decade have not been encouraging. We also find that the benefits of diversification and complexity can be undermined by shortcomings in other areas (for example, macroeconomic instability), consistent with historical experiences in the region. Looking ahead, the key to improving longer-term growth prospects is to prioritize structural reforms and harness knowledge spillovers from greater openness, while preserving sound macroeconomic frameworks. Read more...